Political Connections and Debt Benefits of Firms in India

This paper observes the credit accessibility of politically connected Indian firms for 2002-2015 as well as its long-term persistence. Using a dynamic panel data model for Standard and Poor’s (S&P) Bombay Stock Exchange (BSE) 500 firms, the research finds that the debt studies should consider its dynamic persistence. We find an assiduity of connections with respect to the provisioning of long-term debt to the politically connected firms (PCFs). Among different forms of market frictions that the studies have examined so far, the investigation of political connections linked to the rent-seeking behaviour of different agencies has attracted a great deal of attention of researchers in the last one decade. Some of the prominent studies in this field are Kroszner and Stratmann (1998), Agrawal and Knoeber (2001), Fisman (2001), Johnson and Mitton (2003), Khwaja and Mian (2005), Faccio (2006), Boubakri et al. (2008), Faccio (2010), Bao et al. (2016) and Fu et al. (2017). A close overview of these studies suggests that there are mainly two channels through which firms establish their political connections in an economy. First, by appointing politicians and top bureaucrat as part of management and second, by political funding under which companies through campaign contributions to different political parties seeking extraordinary economic benefits. While, we have a clear understanding about the impact of politics and business nexus on different performance parameters of firms involved in developed countries and even in some emerging markets, what is missing, is the examination of political connections of firms on their credit access as well as its persistence in a decentralized economic set-up such as India. This study is a maiden attempt to fill this void. The study proposed a broader definition of political connections to address the question whether the form of political connection matters for their returns in India’s mixed-economy set up? And if yes, then whether their benefit increases with the strength of connection? The paper provides several empirical evidence to show that PCFs are more indebted as compared to their control group among which those which are contributing to the political campaigns of more than one major political parties mainly possess long-term debt. Thus, higher long-term loan as compared to a short-term loan with high debt dependence made it entirely reasonable to assume that higher indebted firms enjoy greater credit access from their connection supremacy. Under this, PCFs mainly prefer long-term loans to use it as their future crisis immunity. Using a two-stage system GMM to alleviate the problem of endogeneity, we find that the PCFs majorly possess long-term debt among which MPs connection remain insignificant. The results showcase the persistence of strong time-invariant connections with a long-term effect of 4.1% on the firm's long-term debt. For an emerging economy with weak institutional set-up, there can be various channels through which firms get political benefits, but our results indicate that among them the campaign contribution to political parties is an important one. These findings provide new empirical evidence of the significance of political parties, away from the conventional idea, in the emerging Indian economy with numerous decision-making bodies. The results corroborate with the notion that political relationship works in the emerging financial markets that increases positively with the increase in connections. Thus, the paper is a novel contribution to the existing literature which remain silent over the persistence effect of connections as well as their variations with the firm size.